No goal for Europe: Investors still afraid

Spain and Italy played to a 1-1 draw in a Euro 2012 match Sunday. Investors feel like Europe keeps kicking them in the shins.

Spain's banks have asked for a bailout. But investors are still very nervous -- as well they should be.

Yields on 10-year Spanish bonds shot back up to about 6.5% Monday after hitting a low of 6.02% earlier in the day on hopes that the rescue package for Spain was a step in the right direction. Italian 10-year yields also had a volatile day, jumping to about 6% after dipping as low as 5.62% Monday morning. (Maybe the winner of the UEFA Euro 2012 "football" tournament could get an immediate 300 basis point cut in interest rates as a reward? Go Italia!)

"The bond market in Europe either didn't like the Spanish bank news or didn't believe the news and that raised everybody's eyebrows," said Wasif Latif, vice president of equity investments with USAA Investments in San Antonio. "Investors are saying we've seen this picture before. The market is saying, 'Okay, what about Italy now?' The volatility is likelty to continue."

Meanwhile, 10-year U.S. Treasury yields fell to 1.6% and rates on the 10-year German bund dropped to 1.32%. Investors are clearly still desperately seeking safety.

The CNNMoney Fear & Greed Index, while up sharply from a year-to-date low of George Costanza's favorite number (Seven!) a few weeks ago, is still in "extreme fear" mode, at a recent reading of 20 Monday morning.

Jason Pride, director of investment strategy with Glenmede in Philadelphia, said that merely avoiding a near-term disaster isn't enough to stop concerns about the longer-term viability of the eurozone.

"A Spanish bank rescue may save the financial system from a real calamitous event but Spain and the rest of Europe is still experiencing a significant slowdown in economic growth," he said, adding that investors are likely to remain skittish heading into the Greek elections this weekend.

If the anti-austerity Syriza party gains more control, that could set the stage for Greece to leave the eurozone, an event that, depending on who you believe, is either already priced into the market or is the 2012 equivalent of Lehman Brothers going bankrupt. We just don't know how events will play out.

>

Still, Pride thinks that investors have to stop running for the cover of Treasury bonds and start taking more risk. Even if you are nervous about stocks, he said high quality corporate bonds could make sense. But if you don't have the stomach for that, he said investors are better off just having their money in cash. He doesn't think Treasury bond rates can go that much lower.

Calls to get out of the Treasury bond market and other so-called flight to quality trades are falling on deaf ears though. According to data from EPFR Global, a Boston-based firm that tracks mutual fund flows, last week marked the 31st consecutive week of investor inflows into bond funds -- with investments in U.S. bond funds and German bond funds leading the way.

And Latif said long-term Treasury rates are likely to remain near these levels for awhile longer. It doesn't matter that investors have already plowed into bonds and that they could be approaching bubble-like status. Investors are panicking first and asking questions later.

"Fundamentally, you could say that bonds are overpriced and are no longer an attractive investment," he said. "But when fear is running rampant, people may not be focusing on how low the yields are. That should keep rates near these levels."

Sure, a 1.6% Treasury yield may be about as exciting as a 0-0 draw in soccer. But for the time being, investors are willing to sit back, protect the net and settle for a tie.

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.